Published by the Breakthrough Generation.

The financial crisis of 2008-09 has focused the Nation’s attention on the deficiencies of the US financial system. Economists across the political spectrum have called for reform, prescribing the nationalization of banks and re-regulation of the financial sector.

While the focus on the financial sector is justified, perhaps the Nation’s economic woes reflect deeper problems with American economic thought—specifically, the effects of using Gross Domestic Product (GDP) as the preeminent indicator of economic progress and national wellbeing. Perhaps now is the time for America and other developed economies to re-evaluate GDP as measure of progress.

Critiques of GDP are not new. The most eloquent critique of GDP I’ve heard was by the giant of progressive politics, Senator Robert F. Kennedy. In his 1968 address to the University of Kansas, Kennedy had this to say about the indicator (Please note that while Kennedy critiques Gross National Product (GNP) in the following passages, it is comparable to GDP. Kennedy’s critique of GNP applies equally to GDP):

We will find neither national purpose nor personal satisfaction in a mere continuation of economic progress, in an endless amassing of worldly goods. We cannot measure national spirit by the Dow Jones Average, nor national achievement by the Gross National Product. For the Gross National Product includes air pollution, and ambulances to clear our highways from carnage. It counts special locks for our doors and jails for the people who break them. The Gross National Product includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm and missiles and nuclear warheads…. It includes… the broadcasting of television programs which glorify violence to sell goods to our children.

And if the Gross National Product includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry, or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials… The Gross National Product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America — except whether we are proud to be Americans.

People with a good grasp of history will know that GDP (and GNP) was never meant as an indicator of economic progress and wellbeing. Simon Kuznets designed the national accounting measures in the 1930s while working at the National Bureau of Economic Research. The objective of the indicators was to provide quantitative economic data to help plan America’s recovery from the Great Depression. Kuznets developed the GDP as a policy tool, not as an indicator of national wellbeing. For Kuznets, ‘the welfare of a nation can…scarcely be inferred from a measurement of national income…’. This is because GDP is the sum of economic expenditure and doesn’t differentiate between desirable and undesirable expenditures.

Unlike the modern supporters of unqualified GDP growth, Kuznets was well aware of the limitations of this type of economic indicator. In 1962 he wrote that ‘distinctions must be kept in mind between the quantity and quality of growth, between its costs and return, and between the short and long run…Goals for “more” growth should specify more growth of what and for what.’

Given that GDP is a poor measure of economic, social, and ecological progress and wellbeing, it is sensible to consider alternative economic indicators. One such indicator is the Genuine Progress Indicator (GPI) developed by Redefining Progress, a US-based public policy think-tank. While the GDP assumes that the sum of all economic expenditure corresponds with the level of wellbeing, the Genuine Progress Indicator considers the desirable and undesirable effects of economic activity, accounting for desirable and undesirable expenditures. For example, the economic activity generated from cleaning up an oil spill would decrease GPI, whereas GDP would comprehend this as a positive occurrence that increases wellbeing.

It’s important to note that genuine progress indicator has several limitations. Firstly, the GPI presents the level of a given society’s social and ecological wellbeing in dollar terms. Whether you can account for social and ecological wellbeing in dollar terms is a contentious issue. Secondly, the measure could be considered overly ‘subjective’ because it makes value judgments about social phenomena (for example, the GPI assumes that all divorces decrease social wellbeing, and accounts for them as costs). Nonetheless, because the GPI requires us to determine what economic activity is ‘good’ and what is ‘bad’, it sparks a debate about the economic activities that increase economic, social, and ecological wellbeing, and those that don’t.

We need to be pragmatic with economic indicators. Instead of trying to accurately measure wellbeing we should adopt indicators based on their ability to expand our economic thinking. We should ask ourselves whether the indicators are useful tools? Whether they enrich national economic discourse? And whether they expand the landscape of thought and action? Indicators like the GPI go some way to achieving this.

Given that the US economy will feature prominently in President Obama’s first term, Obama has the opportunity to start a conversation about the way America measures its progress and wellbeing. Whether or not the Obama Administration implements national GPI accounting practices, we must remember the limits of quantitative economic indicators. We should treat them as tools, not accurate representations of national wellbeing.

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